EC COMPETITION LAW IN THE TRAMP SHIPPING SECTOR
Candidate number: 8006 Supervisor: Rosa Greaves
Deadline for submission: 01.09.2009
Number of words: 17.550 (max. 18.000)
31.08.2009
______________________________________________________________________________
UNIVERSITY OF OSLO Faculty of Law
TABLE OF CONTENTS
1. INTRODUCTION
1.1 Objective...1
1.2 Structure...2
1.3 Delimitation...3
2. TRAMP SHIPPING MARKET 2.1 The definition of tramp shipping services...5
2.2 The definition of the relevant market...7
2.2.1 General features of the tramp shipping sector...7
A. Highly competitive market...7
B. High degree of dependence on the trade patterns...10
2.2.2 Tramp market segments...12
2.2.3 The relevant market under EC competition law...12
A. Product market...13
B. Geographic market………..………...………...21
3. HORIZONTAL AGREEMENTS IN THE TRAMP SHIPPING SECTOR UNDER ARTICLE 81 EC 3.1 Pool agreements in tramp shipping………..23
3.2 Assessment of pool agreements under Article 81(1) EC……….26
3.2.1 Pool agreements that do not fall under Article 81(1) EC………..26
3.2.2 Pool agreements that generally fall under Article 81(1) EC………..28
3.2.3 Pool agreements that may fall under Article 81(1) EC………..31
A. Economic context and market’s structural factors………31
B. Nature of the pool agreement………34
C. Joint purchasing………37
3.3 Applicability of Article 81(3) EC………38
3.3.1 Efficiency gains……….39
A. Cost efficiencies………40
B. Efficiencies of a qualitative nature………41
3.3.2 Indispensability of the restrictions……….42
A. The efficiencies must be specific to the agreement………42
B. The indispensability of individual restrictions………..43
3.3.3 Fair share of benefits to consumers………...45
3.3.4 No elimination of competition………..46
3.4 The block exemption for specialisation agreements: Regulation 2658/00………..47
4. CONCLUSIONS………..49
5. SOURCES………52
1. INTRODUCTION
1.1 Objective
The repeal of Regulation 4056/861 by Regulation 1419/20062 brought effectively tramp vessel services into the scope of EC competition rules. This long-standing exclusion of the tramp sector from the Community competition implementing rules was considered as an anomaly to the achievement of uniformity of the legal regime, since tramp services, together with cabotage, were the only remaining sectors to receive such a beneficial treatment. The need for a uniform competition law regime became urgent especially after the adoption of Regulation 1/2003,3 with which a new decentralised system, by granting national competition authorities and national courts the power to apply Article 81 and 82 EC in their entity, was established.
The expressed reasons for this immunity of the tramp services were related to the recognition of competitive elements inherent to the nature of the tramp sector resulting from the fact that rates for these services are freely negotiated on a case by case basis in accordance with supply and demand conditions.4 Considering however that similar market conditions are present in other sectors as well, it appears that the exclusion of tramp services should be attributed mainly to political pressure by Member States with high interests in shipping (e.g. Denmark and Greece).
The new legal regime created consequently a certain degree of uncertainty to the industry, which was for a long time self-regulated. In order to assist the undertakings and the associations of undertakings operating tramp vessel services to assess whether their agreements are compatible with Article 81 EC, the European Commission issued the
1 Council Regulation (EEC) No 4056/86, OJ L 378, 31.12.1986, p. 4.
2 Council Regulation (EC) No 1419/2006, OJ L 269, 28.9.2006, p. 1.
3 Council Regulation (EC) No 1/2003, OJ L 1, 4.1.2003, p. 1.
4 See 4th Recital of Regulation 4056/86.
“Guidelines on the application of Article 81 of the EC Treaty to maritime transport services”5 (hereinafter the Maritime Guidelines).
The purpose of this paper is to examine how Article 81 EC could apply to the tramp shipping sector. Throughout this theoretical exercise, an attempt is being made to interpret and implement the competition law principles in the light of the common features of the sector. At each step, issues that require clarification will be addressed and discussed. More specifically, definition of the relevant market for competition law purposes can be proved to be a hard task in the case of tramp vessel services due to the structure of the tramp market; thus, an identification of the unique characteristics of the sector is necessary for a more accurate delineation of the relevant market. Furthermore, tramp shipping pools, the principal form of horizontal cooperation in the sector, will be assessed differently depending on where the centre of gravity of the pool agreement lies; hence, an analysis of the pool’s functions is required. In addition, any restrictive effects caused by the pool have to be balanced against possible contributions to social welfare. Summing up, this paper attempts to point out and deal with the key issues related to the determination of the relevant market and to the assessment of tramp shipping pools in the course of the application of Article 81 EC.
1.2 Structure
The analysis is divided into two major parts, one dealing with the definition of the relevant market (under 2. Tramp shipping market) and another assessing tramp shipping pools under Article 81 EC (under 3. Horizontal agreements in the tramp shipping sector under Article 81 EC).
The first part starts with defining what constitutes a tramp vessel service. The fact that a service amounts as a tramp vessel service is not anymore legally important. Nonetheless, a
5 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, OJ C 245, 26.9.2008, p. 2.
reference to the definition is of relevance from a methodological point of view in order to limit the scope of this study. Afterwards, an account of the general characteristics of the tramp shipping market is provided. A description of those features is important for the comprehension of the structure and operation of the tramp sector, and thus, useful when defining the relevant market. Finally, the definition of the relevant market under competition law is discussed.
A description of tramp shipping pools is the starting point of the second, and more extensive, part. Taking into account that pool agreements are the primary form of horizontal cooperation in the tramp sector, an enumeration of their common features is necessary for the appraisal of their validity under Article 81 EC. Then, the assessment of pools under Article 81(1) is taking place. At this point, it is discussed under which circumstances pools would fall or not within the prohibition of Article 81(1) EC. Following this assessment, it is examined whether pools that infringe Article 81(1) EC may qualify for an exemption under Article 81(3). Therefore, a possible fulfillment by tramp pools of each of the four cumulative conditions laid down in Article 81(3) EC is discussed. Finally, it is considered if pool agreements could benefit from the Specialisation Block Exemption.6 1.3 Delimitation
Pools that are created as a joint venture performing on a lasting basis all the functions of an autonomous economic entity (so called full-function joint ventures) account as mergers and they are considered under Regulation 139/20047 on the control of concentrations between undertakings. Examination of such cases is beyond the scope of this paper.
Issues arising from the dominant position of undertakings operating in the tramp shipping market are a matter of discussion under Article 82 EC. As it was stated earlier, this paper deals only with Article 81 EC.
6 Commission Regulation (EC) No 2658/2000, OJ L 304, 5.12.2000, p. 3.
7 Council Regulation (EC) No 139/2004, OJ L 24, 29.1.2004, p.1.
Finally, it should be noted that the reader is required to be familiar with the commonly used terms in competition law. Such terms are not explained unless it is regarded necessary for the presentation of the topic.
2. TRAMP SHIPPING MARKET
2.1 The definition of tramp shipping services
As stated in the Maritime Guidelines,8 the European Commission will adhere to the description provided in Article 1(3)(a) of Regulation (EEC) No 4056/869 when defining tramp vessel services. According to that definition a tramp vessel service means “the transport of goods in bulk or in break-bulk in a vessel chartered wholly or partly to one or more shippers on the basis of a voyage or time charter or any other form of contract for non-regularly scheduled or non-advertised sailings where the freight rates are freely negotiated case by case in accordance with the conditions of supply and demand”.
The abovementioned definition consists of three operational elements, which all have to be fulfilled, and of a “competitiveness” assumption.10 The method of shipment (“…in bulk or break bulk…”), the method of contracting (…chartered wholly or partly to one or more shippers on the basis of a voyage or time charter or any other form of contract…”) and the sailings’ characteristics (…non-regularly scheduled or non-advertised…) are basically a description of the traditional tramping services.11
It is questionable whether all these elements can be found in newer forms of maritime transport that are divergent from scheduled (liner) and non-scheduled (tramp) transport, as in the case of “specialised transport”, which has already been identified by the Commission in its decision regarding the Trans – Atlantic Agreement (hereinafter the TAA Decision).12 In the TAA Decision, the Commission identified a series of characteristics
8 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, OJ C 245, 26.9.2008, p. 2, para. 11.
9 OJ L 378, 31.12.1986, p. 4.
10 See Athanasiou, Lia I., Competition in liner and tramp maritime transport services: Uniform regulation, divergent application?, in Competition and Regulation in Shipping and Shipping Related Industries, Martinus Nijhoff Publishers, Leiden – Boston, 2009, p.72.
11 Ibid, p. 72.
12 OJ L 376, 31.12.1994, p. 1.
specific to specialised transport, like the semi-regular nature, the large volumes of homogeneous goods and the use of specialised vessels developed specifically to respond to the customer’s needs,13 which render it distinct from liner services and tramp vessel services. Therefore, the “… the non-regularly scheduled…” criterion of the definition could be problematic in its interpretation and as a consequence a thorough analysis of the specific service is required before the Commission can determine whether it constitutes tramp vessel service within the meaning of the Regulation.14
The “competitiveness” assumption (“…where the freight rates are freely negotiated case by case in accordance with the conditions of supply and demand.”) contained in the definition is open to different elucidations.15 First, it could be simply considered as an illustration of the reasoning behind the original exemption from the application of Reg.
4056/86 to the tramp shipping sector.16 This alternative is supported also by the 4th Recital of Reg. 4056/86 which states: “…it appears preferable to exclude tramp vessel services from the scope of this Regulation, rates for these services being freely negotiated on a case-by-case basis in accordance with supply and demand conditions;”. The second option, closer to the principle of narrow interpretation of the exceptions to the EC rules and supported by the majority of the commentators,17 is to deem the “competitiveness”
assumption as a condition for characterising a transport service as ‘tramp vessel service’
according to the definition of Reg. 4056/86. Therefore, not all tramp services fall within the definition. For example, such tramp services, where freight rates are not “freely negotiated”
but predetermined based on an overall service agreement between shippers and tramp operators, should fall outside the definition of article 1(3)(a) of Reg. 4056/86.18
13 Ibid, paragraphs 47,48 and 49.
14 European Commission, White Paper on the review of Regulation 4056/86, applying the EC competition rules to maritime transport, SEC (2004) 1254, Annex, Para 160, note 80.
15 Blanco, L.O., Shipping Conferences under EC Antitrust Law, Criticism of a Legal Paradox, Hart Publishing, 2007, p. 170.
16 Ersboll, N.S., The European Commission’s Enforcement Powers: An Analysis of the Exclusion of Tramp Vessel Services From Regulation 4056/86 and Regulation 1/2003 [2003] ECLR 375, 381-382.
17 See Athanasiou, Lia I., op. cit., p.73, Ersboll, N.S., op.cit., 381-382, Ruttley, Ph., International Shipping and EEC Competition Law [1991] ECLR 9, and Blanco, L.O., op. cit., p.171.
18 Ruttley, Ph., op. cit., p. 8-9.
2.2 The definition of the relevant market
In the following paragraphs, an attempt is being made firstly to identify the general features of the tramp shipping market, then to present the different segments of the sector, and finally to define the relevant market under competition law. The general characteristics of the tramp sector are not legally important under the new regime since there is no exclusion from the implementation of the EC competition rules. However, comprehension of those characteristics can be useful when defining the relevant market under competition law, as well as for the understanding of the structure and operation of the sector.19 The definition of the relevant product and geographic market is necessary when assessing a competition case. Its main purpose is to identify in a systematic way the competitive constraints faced by an undertaking.20
2.2.1 General features of the tramp shipping sector A. Highly competitive market.
As explained under 2.1, the reason, behind the long-standing exclusion of the tramp sector from the application of EC competition rules to it, was mainly the acceptance that the conditions of competition are inherent to the way the tramp market operates. Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has power in the market to influence price. The theoretical model of competition is governed by the law of supply and demand.21 In order to affirm if the tramp market follows a nearly perfect competition model, as it is traditionally said, one has to examine whether the following four parameters are fulfilled: (i) atomicity, (ii) homogeneous product, (iii) transparency of information and (iv) equal access to the
19 Athanasiou, Lia I., op. cit., p. 75-76.
20 European Commission, Notice on the definition of relevant market for the purposes of Community competition law, OJ C 372, 9.12.1997, p. 5.
21 EU Report COMP/2006/D2/002 “Legal and Economic Analysis of Tramp Maritime Services”, prepared by Fearnley Consultants AS., 2007, para. 67.
market.22 Failure to detect one of these four elements does not necessary imply a non- competitive market.
(i) Atomicity. Atomicity is the feature which describes the market that consists of a large number of small producers and customers, whose size is too small to influence the overall market. In the case of tramp market, producers are the shipowners/vessel operators and customers are the charterers.23
Various studies have shown that numerous undertakings, none of which are in position with their actions to influence the prices offered, operate in the tramp sector. More specifically, the figures provided by the study prepared by Clarkson24 show that 4,795 companies own 26,280 vessels of the world’s total merchant fleet, meaning an average of 5 vessels each, hence ownership is indeed highly dispersed.
Difficulties arise when trying to estimate the number of customers. Theoretically, there are several thousands potential customers if one bares in mind the parties involved in each transaction that requires transportation. For example, if the cargo is sold C&F (Cost and Freight), it is the seller, or his agent, who takes responsibility for the transportation. If, on the other hand, the cargo is sold FOB (Free On Board), responsibility for the transportation is on the buyer’s, or on his agent’s, part. Alternatively, an intermediary, a trader, might take care of the transportation, if the transaction is carried out through him. As a result, there are always at least three potential customers in each transaction.25
Therefore, it could be safely assumed that the requirements of the element of “atomicity”
are met in the tramp shipping market.
22 Ibid.
23 Ibid., para 75.
24 Clarkson Research Studies, The Tramp Shipping Market, April 2004, p.1.
25 Fearnley’s Report, “Legal and Economic Analysis of Tramp Maritime Services”, op. cit., para 77.
(ii) Homogeneous product. Homogeneity means that goods and services are perfect substitutes; that is, there is no product differentiation.26 In the tramp sector, homogeneity of the product is understood in the sense that all undertakings supply ship space for transport purposes. Practically, this similarity in the provided services can be found only in sector segments and not in the tramp as a whole. This is a normal outcome of the continuous adaptation of the sector in order to respond to the customers’ needs. From a legal point of view, the notion of homogeneity is useful as part of the demand substitution test.27
(iii) Transparency of information. Transparency of information means that the prices offered are easily available to competitors and clients. Information systems in the tramp sector are very open. Information about revenues and asset prices are published daily and widely circulated in the industry to both shipowners and charterers by a variety of sources.28 Thus, a high degree of transparency is ensured.29
(iv) Equal access to the market. Despite the possible barriers, i.e. the need for assets, the required time, management issues and in some cases technological expertise,30 it is generally considered easy for a new player to enter the tramp market. More thorough consideration of this last parameter will be useful later when examining the criteria for definition of the relevant market under competition law, especially when looking at two of the main competitive constraints,31 namely ‘supply-side substitutability’ and ‘potential competition’.
This brief analysis explained why the tramp shipping sector is traditionally described as highly competitive. In addition, it partly justified the reasoning behind the exclusion from
26 Ibid., para 82.
27 Athanasiou, Lia I., op. cit., p.77.
28 i.e. by shipbrokers or by the Baltic Exchange, which publishes daily reports covering over 64 individual routes for tankers, bulk carriers and gas carriers and produces, in addition, seven indices based on freight assessment. See, Fearnley’s Report, “Legal and Economic Analysis of Tramp Maritime Services”, op. cit., para 86.
29 “The Tramp Shipping Market”, op. cit., p. 4.
30 Fearnley’s Report, “Legal and Economic Analysis of Tramp Maritime Services”, op. cit., para. 121.
31 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 3, para. 13.
implementing the EC competition provisions under the previous regime. Finally, the different issues presented here should be kept in mind when defining the relevant market from a competition law point of view.
B. High degree of dependence on the trade patterns.
The tramp sector displays a high degree of dependence, upstream and downstream, between suppliers and customers. This dependence is mainly reflected on the geographical movement of the vessels, the fluctuation in prices and the evolution of the sector through time. As it was the case for the first general feature discussed, examination and understanding of this feature will later be useful for the market delineation.
Geographical movement of vessels and fluctuation in prices might be caused by a variety of reasons. For example, the production of some commodities, like agricultural32 or forest products33, which account for a significant percentage of the sea trade, is affected not only by seasonal or climatic elements but also by other external factors, like physical catastrophes. As a result, this volatility of the demand side causes the need for modification of the supply side; hence time is necessary for the tramp market to adjust. During the adjustment period, vessels may need to move regionally or to switch from the transportation of one commodity to another. Thus, the possible disequilibrium created affects temporarily the freight rates, i.e. when the supply of transport space exceeds the demand; freight rates drop (and vice versa). The impact on prices by the changes in the demand side will stop when the sector reaches equilibrium again.
The above observation, that the tramp sector is vulnerable to trade alterations, leads to two valuable conclusions. Firstly, whilst defining the relevant market, it will not always be
32 This category of commodities includes products or raw materials of the agricultural industry, such as cereals, animal feedstuffs, sugar, molasses, refrigerated food, oil and fats and fertilizers, and accounts for 13% of sea trade. See “The Tramp Shipping Market”, op. cit., p. 9.
33 This category of commodities includes primarily industrial materials used for the manufacture of paper, paperboard and in the construction industry, such as timber (logs and lumber) wood pulp, plywood, paper and various wood products. See “The Tramp Shipping Market”, op. cit., p.9.
clear whether an increase in price may result in a switch in cargo flow. Secondly, the assessment of a prima facie restrictive agreement should take into account the fact that the supply side cannot by definition act without considering the possible reaction of the demand.34
The dependence of the tramp sector to the demand side is also apparent from the evolution of the sector in time. In the post-War period, the world economy grew rapidly resulting in an increased demand of raw materials by the heavy industry. Under these conditions, the shipping industry had to adapt. This adaptation is mainly reflected in the size of the vessels.
The last decades, vessels became significantly larger. For example, in the 1950s oil tankers had cargo capacity of less than 50,000 dwt. In the second half of the 1960s, the VLCC (Very Large Crude Carrier) had already emerged having a cargo capacity in excess of 200,000 dwt. Similar development was noticed in the dry bulk carriers.35 This expansion in the vessels’ size has led to more cost effective vessels, and to a proportional decrease in the transport cost per tone with the increase in vessel size. Thus, allowing economies of scale to be achieved.36
Apart from the general increase in vessels’ size, another aspect of the shipping industry’s efforts for adaptability to the client’s needs is the specialization of the tramp sector. For example, the carriage of paper and pulp required special handling because both of these products were sensitive to humidity and physical impact. This resulted in the development of OHBC ("open hatch, box shaped bulk carrier") vessels, which were specially designed based on the special characteristics of those products.37 That was also the case for other products and specialization was the sector’s response to the customers’ needs for safe, reliable and fast transport services. Furthermore, as it was already stated, under 2.1,
34 Athanasiou, Lia I., op. cit., p. 79.
35 Fearnley’s Report, op. cit., p. 30, para. 143.
36 Ibid., p. 30, paragraphs 141-142.
37 Ibid., p. 31, para. 146.
specialization in the tramp market led to the recognition that the tramp market segments should be reviewed.38
2.2.2 Tramp market segments
Another element that should be taken into account, before proceeding to the market definition, is the division of the tramp sector in various subsectors. This rather brief presentation might be of use in the delineation of the geographical market (i.e. when examining the range of ports served) and especially when considering the substitutability of the vessels used. It has to be stressed though, that the different segments do not constitute relevant markets themselves.
The tramp sector is traditionally divided into two main subsectors based on the nature of the cargo: the liquid bulk and the dry bulk. Recently, as already described above (under 2.1), the Commission identified39 a third segment, known as "specialised transport" or often referred as “neo-bulk”. These subsectors are further divided into different segments. More particularly, in liquid bulk one can identify the following segments: i) chemical, ii) clean petroleum products (CPP), iii) crude oil, iv) dirty petroleum products (DPP), v) liquefied natural gas (LNG) and iv) liquefied petroleum gas (LPG). Dry bulk sub-division is usually based on the vessel’s size (i.e. Capesize, Panamax etc.). Finally, neo-bulk sector is further separated by reference either to the type of the vessel (Ro-Ro, OHBC etc.) or to the transported cargo (motor vehicles, liquid gases etc.).40
2.2.3 The relevant market under EC competition law
Market definition usually serves as a prerequisite to the calculation of market shares, in the sense that it could convey meaningful information regarding market power for the purposes of assessing dominance (under article 82 EC) or for the purposes of assessing the effects on
38 See the TAA Decision, op. cit.
39 Ibid.
40 Fearnley’s Report, op. cit.
competition of an agreement (under article 81 EC).41 However, because of the complexity of the market definition process, there is always a risk of error. For instance, a broad definition would result to a lower standard of competition law obligations for an undertaking that has indeed significant market power. Hence, delineating the relevant market should be regarded a means to an end and not an end itself.42 In this section, an attempt is being made on how the general principles of market definition, as laid down in the Commission’s “Notice on the definition of relevant market” and in relevant case law, under the light of the recently issued “Guidelines of the application of Article 81EC Treaty to maritime transport services”, could apply to tramp transport services.
The method that it will be followed is the traditional two-stage analysis. At first, the criteria used for the identification of the boundaries between the different product markets will be discussed, specifically (i) demand substitutability, (ii) supply substitutability and (iii) potential competition.43 Afterwards, the elements to be considered when defining the geographical market will be examined.
A. Product market.
(i) Demand substitutability.
Demand-side substitution exists when purchasers of a product would switch to readily available substitutes or to suppliers located elsewhere in response to a small change in relative prices.44 Thus, there is mainly a question of a sufficient degree of interchangeability between products.45 Products that have different characteristics and not the same intended use should comprise distinct product markets. It should be noted here that, in our case, as product is considered the transport service provided by tramp vessels.
41 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 1, para. 2.
42 Bellamy & Child, European Community Law of Competition, 6th ed., OUP, 2008, para. 4.001.
43 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 3, para. 13.
44 Ibid. p. 4, para. 17.
45 See Case 85/76 Hoffmann - La Roche v Commission [1979] ECR-461, para 28.
For the determination of the relevant product market from the demand side, the European Commission sets as a starting point the “main terms” of an individual transport request.
The Commission’s rationale behind this suggestion is that the “main terms” generally identify the essential elements of the transport requirement at issue. For example, voyage charter’s essential elements are the cargo to be carried, the cargo volume, the loading and discharging ports, the laydays or the ultimate date by which the cargo has to arrive and technical details regarding the vessel. Negotiability or non-negotiability of one of the main terms will qualify for a wider or narrower definition of the market respectively.46
The Commission’s approach has been criticised.47 The core of the criticism is focused on the chosen methodology. It was commented that the starting point of the analysis is fixed too late, presupposing that the cargo owner has already decided on how he will ship the commodity to its destination. However, the research into substitutes normally takes place at an earlier stage, when the customer examines which the available transport services are.
In my opinion, the chosen methodology, although the wording at this point is not clear, does not imply that the customer has already made his decision about the best way of shipping his cargo. The Guidelines refer to the “main terms” of an “individual transport request”. The word “request” indicates that the customer is indeed seeking for the best options among the available transport services. In that sense, the “main terms” reflect the customer’s needs. If, for instance, a cargo owner needs a certain type of vessel to ship his commodity but the vessel’s size is not significant for his choice, then the vessel’s size constitutes a negotiable element of the main terms. Thus, the relevant market is wider with respect to this specific element. Nevertheless, this is a point that requires clarification.
Another element proposed by the Commission when examining demand substitutability is the consideration of the transport contracts types (i.e. voyage charters, time charters,
46 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 22.
47 Athanasiou, Lia I., op. cit., p. 82-83.
contracts of affreightment etc.).48 The different types of contracts entail differentiated rights and obligations for the contracting parties. The choice of the contract type is primarily an entrepreneurial decision. The customers, on one hand, monitor rates under different contract types and shift their business accordingly. Shipowners, on the other hand, will try to fix their vessels in the most favourable terms possible, assuring stability and effective freight rates. It is questionable whether and to which extent the different transport contracts can in practice affect the nature of the service provided, and, thus, demand substitutability.
In a recent decision49 (hereinafter the APMM/BROSTRØM Decision), the European Commission, when assessing the element of contract types for market definition purposes, found that there are no vessel availability issues when shifting business from one contract type to another. Moreover, the market investigation conducted by the Commission revealed that the majority of the operators uses at least three of the four possible contract types.50 Therefore, there was no need for subdivision of the relevant market by contract types.
However, consideration of the different transport contracts makes sense when examining the available capacity in certain tramp shipping markets. For example, vessels operating in more specialised trades tend to be fixed in longer term time charters.51 As a result, they can be considered as captive capacity and should not be taken into account when assessing the relevant market on a case by case basis.52
Furthermore, the assessment of interchangeability between the different tramp vessel services requires an examination of the characteristics and the intended use of the ships.
Thus, the types and sizes of the vessels, in connection to the nature of the commodity to be shipped, have to be considered. This requires obviously an ad hoc evaluation.
48 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 23.
49 Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p. 6, para. 34.
50 There are mainly four contract types in the tanker business (which was of concern for the market investigation): voyage charters (VCs), time charters (TCs), contracts of affreightment (CoAs), and consecutive voyage charters (CVs). Ibid., p. 6, para. 33.
51 Fearnley’s Report, op. cit., p. 39, para. 193.
52 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 29.
Firstly, regarding the vessel types, it can be safely presumed that a liquid commodity for instance is not likely at all to be carried on dry bulk vessels; thus, there is no interchangeability between liquid bulk and dry bulk vessels. Things are not that simple in regards to some liquid cargoes that might be possible to be transported on different kinds of liquid bulk carriers. For example, crude oil, apart from being transported on crude oil tankers, is also transported on clean petroleum product tankers, combined carriers (which can carry ore, bauxite and crude oil) and on dirty petroleum product tankers.53 However, substitutability between liquid bulk vessels for the carriage of chemicals is more complicated, depending mainly on the level of hazard of the transported chemical. In addition, when defining the vessel type to be included in the relevant market, the double- hull requirement for tankers in Community waters under Regulation 417/200254 shall be taken into account.55
Secondly, as far as the vessel sizes is concerned, it appears to be the industry’s perception that vessel sizes constitute separate markets.56 This can partly be explained by the fact that generally larger vessels are able to offer more competitive freight rates due to economies of scale.57 Other reasons, for the market segmentation based on the size, are the flexibility of smaller vessels or the vessels’ different levels of ability to sail in adverse weather due to their size. The European Commission seems to concur with the industry’s view. The APMM/BROSTRØM investigation indicated that smaller vessels, on one hand, tend to be more flexible, because they can reach ports where there is low demand and ports with draught restrictions, and they allow customers to send small, regular shipments for just-in-
53 Fearnley’s Report, op. cit., p. 294, para. 1272.
54 Regulation (EC) No 417/2002 of the European Parliament and of the Council of 18 February 2002 on the accelerated phasing-in of double hull or equivalent design requirements for single hull oil tankers and repealing Council Regulation (EC) No 2978/94, OJ L 64, 7.3.2002.
55 See Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p. 3, para. 14. See also, European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 30.
56 See,Fearnley’s Report, op. cit.
57 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 24.
time delivery, while large shipments require storage facilities. Larger vessels, on the other hand, are more fuel-efficient and cost-efficient (in terms of the cost of transport per ton of product, as loading one large cargo produces economies of scale). Finally, it appeared from the same investigation that smaller ships tend to focus on coastal/short-range trade, while larger ships tend to sail on long-haul routes. Moreover, most respondents to the market investigation consider that the 10,000 dwt limit is a generally accepted segmentation in the industry.58 For the above reasons, the Commission concluded that vessels of less than 10,000 dwt belong to a separate relevant market from vessels within the 10,000-60,000 dwt range.
Another element that the European Commission ses out for consideration in its Maritime Guidelines is the existence of chains of substitution between vessel sizes in tramp shipping.59 Vessel sizes at the extreme of certain tramp shipping markets are not directly substitutable but chain substitution effects may constrain pricing at the extremes, including those vessels in a broader market definition.60 Despite the inclusion of that element in the Maritime Guidelines under the factors to be considered for the determination of the relevant product market, the Commission, in the APMM/BROSTRØM Decision, deemed that the chains of substitution between different vessel sizes are closely related to the geographic market definition. Thus, it examined the possible existence of chain substitution effects under the relevant section.61
To sum up, as it appears from the Maritime Guidelines and the APMM/BROSTRØM Decision, there is a variety of factors to be taken into account for the determination of the
58 Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p.
5, para. 29.
59 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 28.
60 See, for example, Case M. 2706 Carnival Corporation/P&O Princess, OJ 2003 L248/1, where the Commission was examining cruise services, and it concluded that premium and economy cruises belong in the same relevant market because of chain substitution effects.
61 Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p.
6, para. 32.
relevant product market from the demand side. In any event, it is necessary to assess demand substitutability on a case by case analysis because of the complexity of the sector and the wide range of the offered tramp vessel services.
(ii) Supply substitutability.
Supply-side substitutability exists where suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices. Then the market may be broadened to include the products that those suppliers are already producing.62 Supply-side substitution is an essential element for the definition of the product market,63 and it is meaningful when its results for the market definition are equivalent to those of the demand substitution research in terms of effectiveness and immediacy. Therefore, the examination of supply substitutability may affirm or even expand the market as already defined if it demonstrates that the suppliers could offer different services immediately and without important costs; hence time and cost are relevant for our assessment.
The Maritime Guidelines set as a starting point for the determination of the relevant product market from the supply-side the technical and physical conditions of the cargo to be carried and the vessel type.64 For example, many oil tankers are able to carry dirty and clean petroleum products. Switching though from a dirty product to a clean product requires not only time but might also entail significant costs. The APMM/BROSTRØM investigation indicated that the cost of cleaning (including the opportunity cost of not being able to use the vessel, unless the cleaning takes place during a ballast voyage) is significant when compared to the price of a typical voyage.65 Apart from the cost and the necessary
62 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 5, para. 20.
63 Case 6/72 Europemballage and Continental Can v Commission [1973] ECR 215.
64 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 25.
65 Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p. 4, para. 17.
time, the investigation pointed out a number of other factors that tanker operators consider before cleaning a vessel in response to a customer's request. In particular, they estimate the prospects of profitability of the “clean” market for a significant period in the future, and whether it is possible to clean the vessel to the degree of cleanliness required by the customer or whether the cleaning can take place before the loading date required by the customer.66 However, the majority of the respondents to that investigation answered that the vessels transporting clean products are indeed substitutable with vessels transporting dirty products.67 Thus, the relevant market from the supply-side will comprise more than one type of vessel, if vessels can be adjusted to transport a particular cargo at negligible cost and in a short time-frame making it possible for different tramp service providers to compete for the transport of this cargo.
Furthermore, it is stressed in the Maritime Guidelines68 the fact that the providers of specialised services might be at a competitive disadvantage for the transportation of other cargo because spesialised vessels are technically adapted to carry specific types of cargo.
Finally, another element to be taken into account is the possible limitations (i.e. terminal and draught restrictions or environmental standards for particular vessel types in certain ports or regions) to the mobility of vessels, which could impede port calls in response to individual demand.69
(iii) Potential competition.
The third source of competitive constraint, potential competition, is not taken into account when defining markets.70 This analysis is only carried out at a later stage as part of the substantive competitive assessment if potential rival suppliers do not pose a sufficiently close competitive constraint to be treated as part of the relevant market through supply-side
66 Ibid., p. 4, para. 18.
67 Ibid., p. 4, para. 20.
68 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 26.
69 Ibid., para. 27.
70 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 6, para. 24.
substitution.71 Supply-side substitution and potential competition are conceptually different issues but there is ‘overlap in part’ since both of them represent an effective competitive constraint related to the conditions of entry in the short-term and in the long-term respectively.72 Because of that close relation to supply-side substitution dimension of the product market, potential competition, i.e. the potential barriers to entry in the tramp shipping market, will be discussed at this point.
The possible barriers, which a new player might face to entry the tramp market, are: a) capital, b) time, c) management and d) technological.73
a) Capital barriers: Despite the large assets required for the acquisition of a ship, the active financing market effectively mitigates the capital cost barrier to entry in the tramp market.
There are various financial institutions that are engaged in the financing of shipping companies, such as commercial banks, export credit agencies, investments banks, private equity houses and finance lessors.74
b) Time barriers: There are two possible ways to enter the shipping market, either by ordering a shipyard to build a vessel or by seeking the desired vessel type in the second hand market. The first option might delay the entrance for several years. However, a more immediate entrance in the tramp market can be achieved by following the second option since the second hand market for buying ships is generally active. Therefore, time barriers are generally easy to be overcome.
c) Management barriers: Becoming a major player requires a lot more than simply buying a ship. Usually, one needs further organization to operate in more industrialized market segments, for example IT systems, human resources, customer relations etc.75 These days, management barriers are not that essential, as investors can operate as pure tonnage
71 Bellamy & Child, op. cit., p. 271, para. 4.054.
72 Case T-191/98 Atlantic Container Line v Commission [2003] ECR II-3275.
73 Fearnley’s Report, op. cit., p. 27, para. 121.
74 Ibid., p. 60, para. 283.
75 Ibid., p. 28, para. 128.
providers to the major shipping companies in the various segments without having any organization or special systems.76
d) Technological barriers: Finally, “know-how” is necessary when an investor wishes to get involved in more sophisticated sectors like the chemical segment, but once again these barriers are significantly mitigated by the way the tramp sector operates.
B. Geographic market.
According to the European Commission’s Notice of relevant market, the relevant geographic market “comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area”.77 The procedure for the determination of the geographic market is again based on an analysis of the demand characteristics,78 and further, if necessary, of the supply factors.79
A proposed starting point in the Maritime Guidelines is to consider the geographic elements that are usually contained in the transport requirements, i.e. the loading and discharging ports or regions. These ports can provide a first orientation for the delineation of the relevant geographic market from the demand-side, but without any prejudice to the final definition of the relevant geographic market,80 because other vessels, which operate in different areas, may easily shift their business if the freight rates make it economical for them to do so.
76 Ibid.
77 “Notice on the definition of relevant market for the purposes of Community competition law”, op. cit., p. 2, para. 8.
78 Ibid., p. 7, para. 29.
79 Ibid., p. 7, para. 30.
80 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 31.
In the APMM/BROSTRØM investigation, the notifying party submitted that in tanker business the geographic scope of the market is worldwide. Its analysis was based on allegedly high correlation rates between spot prices on routes in different regions.
Alternatively, the notifying party proposed a distinction between tankers trading “West of Suez” and tankers trading “East of Suez”.81 In addition, the market investigation showed that in the event of a 5-10% increase in price in a neighbouring area, a quarter of the respondents would not move their vessels there, while another quarter would, and around a half replied “only on certain conditions”.82 Unfortunately, the Commission did not reach any conclusion regarding the relevant geographic market, as there were no competition concerns on any possible market definition.83 As a result, it is not clear at the present moment which criteria will be of significance for the Commission when determining the relevant geographic market for the purposes of a competition case related to the tramp sector. However, it could be safely assumed from the notifying party’s submissions and the conducted market investigation that the tramp shipping sector is an open market characterised generally by geographical substitutability.
Finally, it is noted in the Maritime Guidelines84 that certain geographic markets may be defined on a directional basis or may occur only temporarily because, for example, climatic conditions or harvest periods periodically affect the demand for transport of particular cargos. In this context, repositioning of vessels, ballast voyages and trade imbalances should be considered for the delineation of relevant geographic markets.
81 Commission Decision of 14/01/2009 declaring a concentration to be compatible with the common market (Case No COMP/M.5346 - APMM / BROSTRØM) according to Council Regulation (EEC) No 139/2004, p. 7, para. 36.
82 Ibid., p. 7, para. 37.
83 Ibid., p. 7, para. 39.
84 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 32.
3. HORIZONTAL AGREEMENTS IN THE TRAMP SHIPPING SECTOR UNDER ARTICLE 81 EC.
3.1 Pool agreements in tramp shipping.
According to the information provided by the Maritime Guidelines85 and other studies,86 the principal form of horizontal cooperation between carriers in the tramp sector is the shipping pool. A shipping pool is a collection of similar vessel types under various ownerships, placed under the care of an administration. This administration markets the vessels as a single, cohesive fleet unit and collects – ‘pools’ – their earnings, which, in due course, are distributed to individual owners under a pre-arranged ‘weighing’ system, by which each entered vessel should receive its fair share.87 The reasons for creating a shipping pool and their common features will be discussed in the following paragraphs.
Pool agreements are a form of commercial cooperation between shipowners aiming primarily at a more efficient fleet deployment and spread of the risks. For example, compliance with the time and cargo volume restrictions of a contract of affreightment (CoA) might require capacity (physical or managerial) that small to medium-sized shipowners or operators do not have in order to bid for such business alone or, if they do, they may feel that the risks involved may be higher than what they would normally be prepared to accept.88 Thus, an obvious commercial solution would be the establishment of a pool with other shipowners or operators with similar vessels because a bigger fleet can react quicker and more effectively to the market’s demand, achieving the required capacity to be able to spread its services among CoAs and subsequent voyage charters in a more
85 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, OJ C 245, 26.9.2008, p. 2, para. 60.
86 See EU Report COMP/2006/D2/002 “Legal and Economic Analysis of Tramp Maritime Services”, prepared by Fearnley Consultants AS., 2007.
87 Definition of shipping pools as given by Packard, W.V., Shipping Pools 2nd ed., Lloyd’s of London Press Ltd, 1995, p. 3.
88 Haralambides, H.E., The economics of bulk shipping pools, extract from Maritime Policy & Management, 23(3): 221-237, 1996, p. 225.
coordinated and hence cost effective and efficient manner.89 In this way, ballast legs will be minimized, and as a result higher rate of utilization of each vessel will secure stable incomes for the pool members. Furthermore, achievement of a strong marketing position, high image and better financing possibilities have been indicated, among others, as incentives for creating a pool.90
Shipping pools are formed by individually negotiated contracts, the pooling agreements, which often incorporate a master charterparty (normally a time charter form of common use).91 There is no universal model for a pool but a variety of different pooling structures exist. It is however possible to identify a number of similar features between the different pooling agreements. These common characteristics can be categorised92 as follows:
(i) Similar tonnage: As it was explained above, one of the main reasons for creating a pool is to attract large contracts of affreightment. Thus, the appropriate solution is to pool together the same or similar vessel types in order the pool to be able to offer full flexibility and to be able to substitute vessels where and when it is necessary. As a result, pools are usually specialised in certain product markets. In addition, similar tonnage facilitates the distribution of revenues and voyage costs between the vessels.
(ii) Central administration and joint marketing: In the majority of the pools, a Pool Management Company (hereinafter PMC) markets the fleet as a single, cohesive entity, offering in that way transport solutions regardless of whose ship performs the actual voyage. The PMC, which can be either a separate company (administration controlled pools) or one of the pool members (member-controlled pools),93 is responsible for the
89 Lorenzon, F., and Nazzini, R., Setting Sail on a Sea of Doubt: Tramp Shipping Pools, Competition Law and the Noble Quest for Certainty, in Competition and Regulation in Shipping and Shipping Related Industries, Martinus Nijhoff Publishers, Leiden – Boston, 2009, p. 96.
90 Haralambides, H.E., op. cit., p. 224.
91 Lorenzon, F., and Nazzini, R., op. cit., p. 97.
92 The categorisation is based on Haralambides, H.E., op.cit., p. 221 et seq, and on Fearnley’s Report, op. cit., p. 245 et seq.
93 This distinction was originally proposed by Packard, W.V., op. cit., p. 6, and was followed by Haralambides, H.E., op. cit., p. 222.
commercial management (i.e. joint marketing and negotiation of freight rates)94 and commercial operation (for example, planning vessel movements and instructing vessels, nominating agents in ports etc)95 of the pool. Ship financing matters, manning and the technical management of the vessels lie at the shipowners’ part. Another important task that the PMC performs, apart from marketing the vessels, is to collect the freights and distribute the revenues.
(iii) Negotiation of freight or charter rates: The PMC, acting on behalf of the shipowners and in conformity with the shipowners’ agreed operating instructions for the pool, is responsible for negotiating the freight rates and fixing the vessels on agreed terms and conditions. This feature enhances the view of the pool as a single entity.
(iv) Centralisation of incomes and voyage costs: The PMC will usually collect the freights and will eventually distribute the net result to the members of the pool, after deducting its commission and all voyage costs incurred. The allocation of the revenues is being carried out according to a complex weighing system integrated in the pool agreement.
Before proceeding to a more detailed analysis of pool agreements under the light of the EC competition law rules, it is useful to mention at this point some features of these agreements that are of significance from a competition law point of view. First, the fact that pool agreements’ key feature is the joint marketing and chartering out of the participants’
vessels. Secondly, any possible non-compete clauses96 prohibiting pool members from being active in the same market outside the pool. Thirdly, the notice periods contained in the exit clauses, which regulate the right of the participants to withdraw their vessels.97 Fourthly, provisions of the agreements related to the lay-up of vessels.98 Finally, clauses regarding the exchange of sensitive technological and commercial information.
94 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 61.
95 Ibid.
96 Røsæg, Erik, Organisational Maritime Law, 1993, p. 99.
97 Packard, W.V., op. cit., p. 122.
98 Ibid., p. 113.
3.2 Assessment of pool agreements under Article 81(1) EC.
In the following paragraphs, tramp shipping pools under Article 81(1) EC will be examined. The assessment will mainly take into consideration the Maritime Guidelines, the Commission’s “Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements”99 (hereinafter the Horizontal Guidelines) and relevant case law.
3.2.1 Pool agreements that do not fall under Article 81(1) EC.
There are certain types of pool agreements that by their very nature do not infringe Article 81(1) EC. The European Commission, being in line with the Horizontal Guidelines,100 states in its Maritime Guidelines101 that if the participants to a pool are not actual or potential competitors, then this pool agreement does not fall under the prohibition of Article 81(1) EC. Such a situation is unlikely to be met in the majority of the pools. As presented under 3.1, for reasons of efficiency, pools usually have fleet consisting of vessels of similar type and size, and consequently the owners of the vessels can be deemed to operate in the same product market.
It might be the case however that the undertakings participating in a pool are not able to provide the services covered by the pool independently. For example, when two or more shipowners set up a shipping pool for the purpose of tendering for and performing contracts of affreightment for which as individual operators they could not bid successfully or which they could not carry on their own.102 Therefore, a pool agreement concluded on these grounds will not infringe Article 81(1) EC,103 even if such pools occasionally carry other
99 European Commission, “Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements”, OJ C 3, 6.1.2001, p. 2.
100 Ibid., para. 24.
101 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 64.
102 Ibid.
103 European Commission, “Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements”, op. cit., para. 24.
cargo representing a small part of the overall volume.104 In practice, cases where a shipowner would not be able to operate his vessels without participating in a pool are rare.
Membership of a pool is not usually a necessity but a vehicle for the owners to achieve greater efficiency and to minimise commercial risks. Nonetheless, agreements involving small shipowners, who need to obtain finance on the commercial market and are required by their banks or whoever is financing their vessels to enter into pools,105 might qualify as pool agreements that by their nature will fall outside Article 81(1) EC.
Finally, pools are not caught by Article 81(1) EC if their activity does not influence the relevant parameters of competition106 because they are of minor importance107 and/or do not appreciably affect trade between Member States.108 This follows from the application of the de minimis doctrine which was first formulated by the ECJ in the Volk v Vervaecke109 case. The de minimis doctrine, using a series of quantitative criteria, basically reflects the acknowledgment that undertakings with market share below certain thresholds or small and medium-sized undertakings are rarely capable of appreciably affect trade between Member States.110 That being said, it could be considered as a ‘safe harbour’111 for agreements below certain thresholds.112 However in some circumstances an agreement might be still held to fall within Article 81(1) EC113 even if it is below the quantitative standards as set out by the Commission in its “Notice on agreements of minor importance”
104 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 64.
105 Fearnley’s Report, op. cit., p. 331.
106 European Commission, “Guidelines on the application of Article 81EC Treaty to maritime transport services”, op. cit., para. 65, and European Commission, “Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements”, op. cit., para. 24.
107 European Commission, “Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty”, OJ C 368, 22.12.2001, p. 13.
108 European Commission, “Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty”, OJ C 101, 27.4.2004, p. 81.
109 Case 5/69, Franz Völk v S.P.R.L. Ets J. Vervaecke [1969] ECR 295.
110 European Commission, “Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty”, op. cit., paragraphs 2 and 3.
111 Whish, Richard, Competition Law 6th ed., Oxford University Press, 2009, p. 139.
112 European Commission, “Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty”, op. cit., para. 7.
113 See, for example, Case 19/77, Miller International Schallplatten GmbH v Commission [1978] ECR 131, where Miller’s market share was assessed around 5% but nevertheless the agreement was found to infringe Article 81(1) EC.
